PAYE and the independent contractor

• It must be determined whether the services are required to be performed mainly at the premises of the client. If the services are required to be performed mainly at the premises of the client, proceed to the next test (immediately below). If not, the "further" statutory tests do not apply.
• It must be determined whether the person who rendered or will render the services is subject to either the control or the supervision of the client as to the manner in which his or her duties are performed or to be performed or as to his or her hours of work. If so, the "further" statutory tests apply.

If the "further" tests apply, a person is deemed not to be an independent contractor for purposes of PAYE and, accordingly, PAYE must be deducted from amounts paid to such person. If they do not apply, the employer must continue to apply the common law "dominant impression" test.

Note that an independent contractor who is deemed not to be an independent contractor for purposes of PAYE (and who is therefore subject to PAYE) is not also deemed to be an "employee" (although he is also subject to PAYE, like an employee). An independent contractor who is truly independent under common law will remain unaffected by the deeming provisions of the statutory (PAYE) tests. This means that the independent contractor will not be affected by the limitations on deductions imposed by section 23(m) of the Income Tax Act.

Common law tests

• Save for the statutory rules, there are no fixed rules that can be applied to determine whether or not a person is an independent contractor and the Interpretation Note confirms that the common law tests do not permit a "checklist" approach. In terms of the common law tests, a "dominant impression" of the employment relationship must be formed. 
• The dominant impression test is split into several indicators of differing significance or weight (none of which is conclusive by itself), which have to be applied in the relevant context. The Interpretation Note states that the "dominant impression" test is "an analytical tool that is designed for application in the employment environment to establish the dependence or independence of a person". The assessor must analyse the employment relationship in the light of all the indicators and their relative weightings, and arrive at a dominant impression, in favour of either the acquisition of the worker's productive capacity (which indicates an employment relationship), or the result of the worker's productive capacity (which indicates that the person in question is an independent contractor).

In certain circumstances, a person cannot be considered to be an independent contractor for PAYE purposes, irrespective of the nature of his relationship with the employer. In these circumstances, it is not necessary to apply the statutory and common law tests. One example is a person who is not tax resident in South Africa - any amount of "remuneration" paid to a non-resident person will be subject to PAYE, notwithstanding the fact that the person may carry on a trade independently from the person paying him. 

It is the responsibility of the employer to determine whether or not the payments are subject to PAYE. It is advisable that the employer retain documentary proof of his/its analysis in arriving at a conclusion as to whether or not a worker is considered independent after applying the statutory (and possibly also the common law) tests. An employer who has incorrectly determined that a worker is an independent contractor is liable for the PAYE that should have been deducted, as well as associated penalties and interest. 

If an employer has any uncertainty as to whether or not to deduct PAYE from payments made to a person who considers himself to be an independent contractor, it would be advisable to obtain advice from a specialist tax advisor.